Capital Controls and the Cost of Debt

Andreasen Eugenia ,
University of Santiago

Valenzuela Patricio ,
University of Chile

Schindler Martin,
International Monetary Fund and the Joint Vienna Institute

Using a novel panel data set for international corporate bonds and capital account restrictions in advanced and emerging economies, we show that restrictions on capital inflows produce a substantial and economically meaningful increase in corporate bond spreads. This effect is particularly strong for bonds issued by small firms, bonds issued by firms located in countries with underdeveloped financial markets, and during periods of financial distress. By contrast, we do not find any robust significant effect of restrictions on outflows. Overall, our results suggest that the effect of capital controls on inflows on the cost of debt is particularly strong for more financially constrained firms, establishing a novel channel through which capital controls affect economic outcomes.